USD/JPY Takes Out 104.50 – 105.00 Next?

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Market Drivers for December 20, 2013
S&P Downgrades EU to AA
BOJ – no change on QE for now
Nikkei 0.07% Europe .47%
Oil $98/bbl
Gold $1194/oz.

Europe and Asia:
EUR GFK Consumer climate 7.6 vs. 7.4
GBP UK GDP 0.8% vs. 0.8%
GBP PSNB 14.8B vs. 6.6B

North America:
USD Final GDP 8:30
CAD CPI 8:30
CAD Retail Sales 8:30

USD/JPY finally took out the 104.50 level in late Asian session trade today overcoming the vast amount of option barriers in that area as momentum flows finally broke through. The pair received no support from the latest BOJ meeting at which Governor Kuroda simply reiterated the past QE targets without promising to increase the program. He further added that the BOJ monetary policy is not aimed at the FX markets and that he believes the current course puts Japanese economy on target for 2% inflation rate.

Although BOJ did not add “fuel to the fire” by increasing accommodation just as the Fed was removing it, the central bank’s steadily dovish stance was enough to convince currency traders to take USD/JPY higher as the divergence in the monetary policies of the two economies will become more pronounced in 2014.

In Europe the S&P downgraded the from “AAA” to “AA+”, citing weaker credit worthiness among the bloc.”The downgrade… reflects our view of weaker creditworthiness among the 28 EU member states, including among net creditors to the EU’s budget,” the agency said.”We consider that the EU’s financial arrangements have deteriorated, and that cohesion among members has lessened.”

The news initially pushed the EUR/USD to a low of 1.3625 but the pair quickly found buyers at that level and rebounded to 1.3650 by mid-morning London dealing. The pair continues to find good support ahead of the 1.3600 level as end of the year portfolio flows and enthusiasm about global growth prospects keep the EUR/USD well bid. Despite the taper the EUR/USD continues to surprise the FX market with its resilience and if buying persists into the North American session the pair could rise to 1.3700 as shorts get squeezed.

Meanwhile cable was the laggard all night long as UK data came in mixed with GDP revision in line at 0.8% but Public Sector Net Borrowing ballooning to 14.8B from 6.6B eyed and Current Account deficit rising to -20.7B versus -13.8B. The pair remains glued to the 1.6350 level with 1.6400 acting as a cap for now.

In North American trade the market will get the final US GDP revision for Q3 with market looking at no change from the prior 3.6% reading. However if the data is adjusted upward even slightly it may provide the boost for USD/JPY to push towards the key 105.00 level as the day progresses.

Boris Schlossberg
Managing Director

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